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President Obama expressed outrage today, three days after an IRS official apologized for agency actions targeting certain conservative groups for extra scrutiny. Members of Congress from both parties had already been preparing hearings to grill IRS officials. As NPR's Peter Overby reports, the controversy is rooted in a question neither the IRS nor the Congress has ever answered clearly: What kind of political activity is allowed for tax-exempt groups, in particular the ones with secret donors?
PETER OVERBY, BYLINE: The problem began in 2010, with a surge of groups seeking tax-exempt status in the wake of landmark federal court rulings on campaign financing. It was also the time when the Tea Party movement was going full throttle. Lots of new groups filed for tax exemption under Section 501(c)(4) of the tax code. That's the section governing social welfare organizations, under rules allowing them to spend up to 49 percent of their money directly attacking or promoting candidates for office.
And with the Supreme Court Citizens United ruling, corporations could give freely to finance these new groups. Faced with a surge of applications, the IRS called out those they considered problematic, including 75 targeted simply because the groups used words like tea party or patriot in their names. Alan Dye is a Washington lawyer representing a half dozen of those groups.
ALAN DYE: In most cases, you could usually get - count on getting an answer - an exemption or a denial and almost always an exemption letter - within about nine months of filing the application.
OVERBY: Instead, Dye says they got a big questionnaire, much bigger than usual.
DYE: Several pages of very dense, single-spaced questions.
OVERBY: And since then...
DYE: Nothing has happened, and we're now 30 months out.
OVERBY: Dye says he's been trying to reach the IRS the past several days but hasn't gotten a callback. He says the IRS shouldn't have targeted his clients.
DYE: Mostly they're involved in grass-roots organizing for legislative change, which is exactly what a (c)(4) organization is supposed to do. That's what the category is intended for.
OVERBY: That's also where the confusion starts.
RICHARD SCHMALBECK: It's hard to even imagine an explanation for that that isn't based on political bias, at least, and yet there is such an explanation.
OVERBY: This is Richard Schmalbeck, a professor of tax law at Duke University Law School. Briefly, there are three big categories of tax-exempt groups here. The ones under Section 501(c)(3) are charities, and they engage in charitable work. They're allowed to do only minimal political activity.
At the other end of the spectrum, Section 527 organizations are purely political, and they have to disclose their donors. In between are the 501(c)(4)s. They can do issue advertising and some campaign politics, but not too much. The basic IRS rules on all this go back 60 years, and the updates are sometimes contradictory. Again, Richard Schmalbeck.
SCHMALBECK: Having read it myself, I have to say it's less than crystal-clear what this is.
OVERBY: In this case, he says...
SCHMALBECK: They don't seem to have been very sensitive to the optics, to the high sensitivity that people have about abuse of IRS powers and the legacy of President Nixon using IRS audits in an effort to harass political enemies.
OVERBY: But ever since 2010, the 501(c)(4) category has swelled, with groups that have electoral politics on their minds. Ellen Aprill is a tax law professor at Loyola Law School in Los Angeles.
ELLEN APRILL: It would be good to establish a clearer test, but it would be best - and perhaps only possible - not right near a campaign.
OVERBY: And not right near a congressional investigation either. So don't expect any bright new lines to be drawn anytime soon. Peter Overby, NPR News, Washington.